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Should a termination clause be invoked in good faith?

August 2016 - Issue 84

The Commercial Court has found in the case of Monde Petroleum SA v Westernzagros Ltd [2016] EWHC 1472 (Comm) that the implied term of good faith in relation to a termination clause was unnecessary and inconsistent with the express termination provisions of the contract.

Westernzagros (WZL) was in negotiation with the Kurdistan Regional Government with regards to exploring for oil and developing oil production in Kurdistan, with which Monde Petroleum SA (Monde) was helping under a consulting services contract. Part of the contract was that Monde would be given an option to acquire a 3% working interest in the oil project on specified conditions.

After the oil contract was executed and ratified, WZL served notice to terminate the consulting contract under the express terms, but failed to give the 30 days’ notice required. Monde argued that WZL had acted in bad faith by depriving Monde of its right to a share in the profits, as well as arguing that WZL did not serve notice that complied with the contract. Monde sought damages for the loss of chance to participate in the oil project.

It was held that implied duties do not affect an express contractual right to terminate. Monde had little or no prospect of meeting the conditions for participating in the immediate future of the oil project and, as such, WZL would have had to continue to pay Monde whilst receiving little or no expected benefit. The judge concluded that the fact that a contract was long-term or "relational" was not enough to justify implying a duty of good faith.

An express contractual right to terminate could be exercised irrespective of the reasons for doing so, provided that the conditions of termination provided for in the contract are met. Thus, the court also considered the effect of a termination notice served but which had not fully complied with the 30 days’ notice required by the termination clause. It was held that it should comply as closely as possible with the contract and so the termination notice was found to have no effect and it did not terminate the contract. At worst, it could amount to a wrongful repudiation of the contract (Although the judge held in this case that serving the notice had not been a breach of contract at all).

This case demonstrates that the implied duty of good faith carries less weight than an express termination clause.

Whilst in this case there was no breach of contract for the defective termination notice, it is important to comply as closely as possible with the contract terms when invoking a termination clause, to avoid arguments for repudiating the contract. If you fail to do so and consequently repudiate the contract, then there is the possibility that you will find yourself liable for damages.